Saturday, October 27, 2007

German Efficiency?

According to this fascinating NY Times story, in Germany, it is illegal to sell new books at a discount. This regulation helps keep small, independent bookstores and publishers in business:
In the United States chain stores have largely run neighborhood bookshops out of business. Here in Germany, there are big and small bookstores seemingly on every block. The German Book Association counts 4,208 bookstores among its members. It estimates that there are 14,000 German publishers. Last year 94,716 new titles were published in German. In the United States, with a population nearly four times bigger, there were 172,000 titles published in 2005.
At first glance, this is economically inefficient - high-cost retailers are not driven out of business, economies of scale are not realized, and Germans pay too much for their books. Three reasons come to mind about why the German regulations might make economic sense (i.e. improve overall welfare):
  1. People like having bookstores in their neighborhood, and enjoy spending time there (even if they don't buy anything), and like variety, so the small bookstores have a positive externality for consumers.
  2. A positive externality for national culture (which seems to be the argument of most of the people quoted in the story).
  3. The utility of the producers themselves. Our customary models of profit maximizing firms ignore the obvious fact that many people - and I suspect this is particularly true of many small business proprietors - are motivated more by a sense of pride and accomplishment in their own work, than by wages.
The Germans are concerned by a recent decision by the Swiss competition commission to allow discounting. The director of the commission said:
It was a cartel. The German and Swiss booksellers said it was for a good purpose — they made a cultural argument, but we are an economic commission. They said the system fosters a broader, deeper market for books, that discounting will hurt the small booksellers who support the small publishers, and then you will have fewer books and more focus on best sellers...

I’m not quite sure they’re completely wrong. Nobody knows for sure yet. But nobody can read one million titles, so the question is, is it better that more people read fewer books or that fewer people read a lot of different books?

That's a good - and difficult to answer - question. However, being an "economic commission" is not a reason to disregard a cultural argument - good economic policy should be about improving the well-being of people ("welfare" or "utility"), much of which derives from difficult to quantify, non-pecuniary sources.

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